Investing In Tobacco Dividends – Collect ‘em If You Got ‘em

Warren Buffett and his pal Charlie Munger always say that they are looking for companies that have a “durable competitive advantage” and have low debt levels. Well, if millions of people around the world are strongly addicted to your product, and you have no real debt to speak of, does that qualify (Buffett has in fact owned stock in a smokeless tobacco company, and the giant RJR Nabisco which sold tobacco products)? From a complete numbers point of view, it still pays to be with the tobacco companies instead of against them. Sure, popular culture in North America might be trending away from the old school Marlboro Man icon, but internationally cigarette sales have never been healthier (now there is an oxymoron) and the smokeless tobacco market seems to be taking off as well. The products created by tobacco giants such as Altria, Philip Morris, Reynolds America, and Lorillard are not going out of style any time soon. They have great profit margins, solid shareholder pay back histories, and will likely be nice little income-generators for your portfolio. For this reason, many investors who usually leave their emotions at the door when it comes to comes to distributing capital are left with a moral conflict.

Talk About a Controversial Investment

investing in tobacco

My mother is a classic “lifer” in the world of tobacco use. She started when she was young in order to look “cooler” and more grown up, and she has never been able to break the habit despite several tries at quitting over the years. To further illustrate the situation, she is a public health nurse who knows full well the dangers and risks she is taking, yet the need for nicotine and the various other chemical dependencies that go with cigarettes is stronger than that knowledge. My father-in-law is in much the same boat. He has been a pack-and-a-half-a-day smoker for decades despite being one of the smartest people I know, and a specialist in biology. There is no disputing that tobacco causes intense harm to individuals and their loved ones, the health system, and second-hand victims. It is also a fact that tobacco is addictive. So how do they tempt people into investing in them? I think it boils down to justifying our natural human greed.

Investing In Tobacco Dividends – Ethical?

“If I didn’t own the company someone else would. I don’t force anyone to buy the product, and if I wasn’t there to provide it someone else would be.”  This is either a justification for owning part of a tobacco company, or the justification for being a drug dealer. Interesting that it is equally logical, and equally compelling in either case. The only difference is that in the case of tobacco you could add, “It’s legal.” Really, if the government allows it, how bad could it be right? I think talking yourself into having a tobacco company as part of your portfolio is pretty easy if you really want to. I mean seriously, where do you turn these days if you are looking for a company the Boy Scouts would endorse? Apple employs slave labour in China (as do most technology companies), Wal-Mart has stores full of clothes made by kids in sweat houses, oil companies are purported to be killing our planet while at the same time killing our wallets at the pumps, and you can now even invest in medical marijuana if you so choose. Needless to say that this whole morals and values territory is getting pretty grey. When medical insurance companies such as Sun Life are investing billions of dollars with tobacco giants such as Philip Morris, it is tough to play the good guy card and keep your hand out of the steady stream of profits.

I Hate Smoking – But Love Nicotine-Fuelled Income

Tobacco stocks are a simple product to understand, and their balance sheets are almost always strong and inviting. Sure there are constant litigation cases in the courts, but these companies have the best lawyers in the world and this stuff has been going on for decades. I would say many are in far less danger than off-shore oil drilling companies. Developing countries around the world are increasing in population far faster than Europe and North America, and these countries have very lax regulations on tobacco use, and hardly any social taboo exists either. This means that tobacco companies have plenty of room to grow and expand going forward.

Investing in tobacco stocks has become quite popular in the last few years as they are one of the few industries that are resistant to recessions (addiction will do that for you), and they know for distributing solid dividends over a long period of time – music to the ears of a new generation of retirees looking for income-producing assets to park their money in. Here is a snap shot of some the current tobacco companies on the market today (all stats taken from the May 3 edition of the Globe and Mail):

Reynold’s America (RAI): Currently trading near its 52-week high of $42.81 (with a low of $31.82). It has a P/E ratio of 14.52, and a dividend yield of 5.50%.

Altria (MO): Currently trading near its 52-week high of $32.41 (with a low of $23.20). It has a P/E ratio of 15.56 and a dividend yield of 5.10%.

Philip Morris (PM): The granddaddy of big tobacco is trading near its 52-week high of $91.05 (with a low of $60.45). It has P/E ratio of $17.95 and a dividend yield of 3.40%.

Unethical Relative To What?

Notice a trend here? It seems like most advocates of dividend investing have decided that tobacco products are someone else’s problem and are deciding they want a piece of the profits generated by nicotine addiction all over the world. I figure since we already keep the developing world in sweat shops with the products we buy (and invest in), we may as well profit from their lungs’ demise as well right? If you’re not a fan of these companies, you could always invest in one with a pure past and product like Coca-Cola right? I hear Buffett knows something about that one…

Full Disclosure – I do not currently own any tobacco stocks in my portfolio, but have considered adding them in the past, and likely will in the immediate future as well.

 

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37 Responses to Investing In Tobacco Dividends – Collect ‘em If You Got ‘em

  1. At the same time a great number of consumer products try to put an element of addiction in their products. Take a look at World of Warcraft or farmville. Seeing as there products are also addictive [and have destroyed the lives of many people] would the profits from these companies be viewed in the same light as those from tobacco companies?

    • Wow, calling out Blizzard for making such good games that they are addictive. Interesting! What is left out there for actual ethical investing if you’re going to draw the line that close in the sand? Not a heck of a lot!

      • To be fair, I’m pretty sure people literally lost their jobs because of their WoW addiction. Blizzard recognized the problem and started awarding experience for offline time to incentivize people to step away from the computer.

        • That’s crazy. I have to admit to having a WoW experience myself. Here is a story for nerds everywhere. I was a Warcraft geek going back to when I was like 8 years old and played Warcraft 1. I loved the whole series, and even bought the novels based on the main characters. When I was 14 WoW came out and my parents got it for me for Christmas. I quickly became addicted. I mean every single spare second I had was spent on there. I gained weight, pulled away socially from everyone, and lived for the game. After about 4-6 weeks I packed the game up and never opened it again. I had to go “cold turkey,” I just couldn’t handle the game. I guess it doesn’t sound much worse than tobacco use when I put it that way…

  2. If I invested in individual stocks I would probably consider these as well. Maybe smokers should invest in them so they can get some of their money back. They shouldn’t have the ethical dilemma that non or anti smokers may have.

    • Maybe our government (Canada) should invest in them so that we can get some of our health care dollars back from the intense treatment smoking-related illness costs our citizens at large.

  3. I have a couple of tobacco stocks in my dividend portfolio. Although I try to take good care of myself, I’m quite comfortable with so-called sin stocks. The high-fructose corn syrup in Coca-Cola is just as addictive and harmful to health, if only on a longer time scale. Care to die of emphysema or type II diabetes?

    • Yah, the more I thought about it the more I came to the same conclusion. If society believes in freedoms enough to allow the product to be sold, our conscience should be clear right?

  4. I’d never really thought about it – but it’s not like you (or anyone else) owning the stocks is going to encourage anyone to pick up smoking. So, why not make some money off someone else’s bad habit?

    • I’m surprised there hasn’t been at least a token backlash to this whole owning a tobacco company deal. I kind of find myself agreeing with everyone, but at the same time, isn’t there some soul out there better than us profit-seeking monsters who thinks that supporting an entity that is directly responsible for hundreds of thousands of cancer cases every year is wrong?

      • @TM- I’m going to backlash! My boyfriend has been smoking for more than half his life and it pains me to see him so addicted. He tried quitting a few times but has been unsuccessful.

        As much as I love dividends and profitable investments, I couldn’t invest in tobacco companies. :(

        • Yes, thank you Young, I feel better having someone to keep us hooligans in line! My mom has the same addiction. How do you respond to the arguments of the fact that tobacco is legal, no one is forced to smoke, and that so many companies on the market today could be described as unethical? I mean look at SNC-Lavalin as the most recent Canadian example. An engineering company that was a flagship Canuck stock, they apparently do regular business with Gadaffi-like characters.

  5. A mutual fund manager once told me, I don’t care what the company makes; I buy good companies to make my clients money. If you want to use your money to make yourself feel good, donate it to a homeless shelter. If you are investing, forget about what the company makes and invest in it to make money.

  6. I’m really disappointed in this post. I’ve been following this blog for a while. I understand it’s about making money and being wise.

    When you buy stocks in a company, you’re investing in them. You are lining their pockets so they can advertise, pay their lobbyist to fight the government to be more lenient on laws, and you’re paying for their lawyers.

    Sure they make billions, but they are feeding off the weak and taking advantage of people dependant on their products.

    And there are a couple of comments of people saying things like “let’s profit off of other’s people’s addiction”. You’re also profiting off of kids who are greatly affected by second hand smoke, and even kids whose mothers smoked while in the womb.

    If you’re not concerned about where you money goes, you should invest in Diamond minds in Sierra Leone, and maybe even send some money to the rebels. If they ever overthrow the government, you might get some of your hard heard money back.

    • Greg, I’m happy to have you as an angel on my shoulder buddy! I’m sorry to disappoint you, but it’s important to look at all angles right?

      In terms of your examples, doesn’t Caffeine negatively effect kids in the womb? Doesn’t McDonald’s cause record obesity rates? Don’t energy companies pollute our environment everyday? Where do you draw the line? Also, just out of curiosity, have you bought an engagement ring, and if so, did you make sure it wasn’t a blood diamond?

      • I agree it definitely is. I’m not disappointed that you posted this, more that we allow individuals to invest in this companies.

        Caffeine – yes, mothers should not be drinking it
        Mcdonalds – yes it does. And I don’t support them or any fast food company. I try to stick with local producers and I grow as much as I can
        Energy companies – they sure do. I try to offset my usage by planting trees and cleaning up the environment in other ways. Unfortunately I’m in a city and I have to use the energy company. But once I get my farm, I plan on being self sustainable.
        and the ring – you better believe it’s certified canadian. I did my research and made sure I bought it from a reputable canadian supplier.

        I know I’m not the common man. I don’t draw the line. I know that there’s cause and effect. For every negative thing I do, I do something good back.

        I’m only 28, and I begin to fear for my future grandkids. This planet will not be the same planet that we know. Urban sprawl is killing us.

        • Wow, I am impressed Mr. Cooper!! That is an impressive “walking the walk” and I’m glad to hear that there are people as good as you out there. I was hoping someone would comment as my conscience. Do you actively invest in “green energies” and the like then?

  7. Hey TM,

    The Dividend Monk and Dividend Mantra would completely agree with your pic. :) In fact Dividend Monk just wrote a nice detailed post on Philip Morris yesterday – check it out.

    I don’t have any tobacco companies in my portfolio, and I’m certainly not opposed to investing in them. I’d prefer to invest in Johnson and Johnson, Stryker, or Becton Dickinson, which make the medical products that look after smokers when they become ill. ;) After all what other industry can you think of that kills its best customers?

    Kidding aside all the tobacco companies are trading at premium right now, not sure if they will ever be cheap – much like KO or MCD. You pay a premium for safety. But these would be great stocks to keep on the watchlist, and buy on the dips…

    Right now with market volatility investing only in quality companies is the way to go . ;)

    Cheers
    The Dividend Ninja

    • Thanks for the tip DN. It seems weird talking about these companies as “quality,” but balance sheets don’t lie right? (well as long as they aren’t owned by investment banks that is.)

  8. I may have out nerded both of you

    Were you guys addicted to Command and conquer, civilization, or diablo?

    Because I was

    • It’s actually not that difficult to out-nerd me. My nerdliness has been on a steep decline since graduating college. I was never a huge gamer myself, but at least in college all of my close friends were.

      • Yah, the funny thing is that I was into comic books, and strategy games in high school, but I never did get into consoles much. Once young ladies started catching my eye more and more often, and sports started to pick up the old pastimes started to fall by the wayside.

  9. I’ve never thought of this before, but what a great investment idea! It’s not good to promote the practice, but while people are doing it, you might as well profit from it. And people will never stop doing it.

  10. I will never invest in a tobacco company. I do not care that others do, to each their own, but I do not.

    Even setting aside the moral issues, there are reasons not to buy tobacco companies.

    You said it in a comment above. For the most part the best customers of tobacco companies are rewarded for their loyalty with death. This is also true with obesity issues of Coca-Cola or McDonald’s but it is different to me on some level.

    And you mentioned your mother’s attempts to quit smoking. A good business model does not include having a large portion of your customers desiring to not use your product. I know lots of smokers enjoy it and don’t want to quit but lots also are actively trying to quit. This can also be applied to oil, soda, and fast food companies. However, while not necessarily a requirement, oil is the heat and fuel source for many. Right now alternatives are not as practical, so oil is the solution that makes the most sense for many. Beverages are a need, and Coke and Pepsi both sell lots of healthy products. McDonald’s and most fast food companies have a large variety of healthy options as well. There is at least some sense of a conscience for those industries. Not many people could argue the same about tobacco companies.

    And as time passes there will always be increasing legislation against cigarettes. In Canada you can’t smoke inside in public, within 10 metres of building entrances (a law I often see skirted),half of all the packaging needs to contain health warnings, advertising against smoking is exponentially more visible than pro smoking ads. An while the laws are more lax in other place around the world, that too will change. While the government in Vietnam or similar less developed areas do not devote much time tobacco, in the future further into their development, once they have met the more drastic needs their citizens face (starvation, war, poverty, injustice, crime) their heads will turn to smoking. That may be after my lifetime and yours, I think it makes the growth potential less appealing than you state.

    I would prefer that I could convince you and the millions of others who disagree with me to stop investing in these companies but I can’t. I can only keep my small amount of money away from them. someone else will take my place in line, but I can say my money isn’t contributing to promoting lung cancer, emphysema, etc. Yes Philip Morris might be a good company, but there are a dozen others that are good investments as well. The little bit of diversification or the very tiny difference it would make to the yield of your total portfolio is not worth it to me. Yes tobacco companies may be a good investment based on your individual criteria, but there is no reason you need those stocks. Pick a different stock and in 20 years you will not be able to tell the difference as long as you pick another good one.

    • Very well articulated Tyler. Just to play devil’s advocate, how would you respond to the following argument?

      1) Caffeine and alcohol are addictive substances. What is intrinsically positive about those substances? Would you really argue that Pepsi is a moral product because it owns some healthy foods? Philip Morris owns some other assets besides tobacco, does this make it a good company too?
      2) In this day and age, one could actually argue that fast food is actually more dangerous than a limited amount of cigarette use.
      3) I would disagree with you about McDonald’s or oil companies having a conscience. McDonald’s is doing an excellent job branding itself that way, but I would argue the percentage of people that eat “healthy” at MD’s is minuscule, and that the “healthy” options really aren’t that healthy anyway.
      4) Would smokeless tobacco be ok then since it’s health hazards are substantially lower than cigarettes? Where is the line drawn?

      In terms of arguing investments, you’re probably right. At the same time, if the government sees fit to allow people to consume it, why should I let my conscience bother me about investing in a solid company?

  11. In no way are caffeine and tobacco comparable. While caffeine may be addictive (much less so than tobacco), it is far from deadly. It may cause birth defects with pregnant women, minutely increase blood pressure, maybe a couple other side effects too, but I don’t think that the two are related in anyway. Caffeine has many positive effects as well. It is a thermogenic, it increases awareness, and probably other benefits I do not know. I haven’t studied it but there is a big difference between tobacco and caffeine that even a devil’s advocate (or devil) cannot ignore.

    Alcohol is trickier. Modest alcohol intake has been shown to be beneficial for health, But it is the abusers you are referring to here. I do not advocate investing in breweries or bars or any alcohol distributors either. In this case however I might consider it because I do consume alcoholic beverages, and they can be used safely. There is no way I can justify smoking though.

    I never implied that either caffeine or alcohol is positive at all. They are a different category than tobacco. I would not argue that Pepsi is immoral in anyway. I do not believe in drinking the sugar water, nor do I condone so much of the advertising to children, but soda can’t be seen as evil. I don’t find the comparison valid really. I think that the soda business was very different when Pepsi was invented and Pepsi and Coke are adapting to the research available now. People didn’t like the sugar in pop, so they began using aspartame, some did not like aspartame so they started using Splenda. They kept the other products around because that is what some people like. People have known that nicotine and tar and tobacco and whatever other poisons are in cigarettes are bad, and correct me if I am wrong but there aren’t many products that offer the benefits of smoking without any of the downsides. Smokeless tobacco is close, I would need to look into it more, but tobacco in and of itself appears to be really bad for health, so it is almost impossible for there to be a safe smoking/tobacco alternative. I came into this discussion not fully armed because I do not know all Philip Morris’ products, but I find it hard to rationalize selling tobacco.

    I do not think that anybody could argue fast food is better than smoking. As bad as eating three Big Mac’s a day may be, I do not know anybody (you might) who would tell you that cigarettes are healthier. Fast food is an excess of a biological need. You might not need 5000 calories of french fries but you do need 2000 a day. You never need t and ideally never would inhale smoke and other toxins. Exercise can offset a bit of the damage of fast food, you can’t run off a terrible diet but exercise and other lifestyle behaviours can mitigate plaque build up, weight gain, stroke risk, etc. No matter how far you run you can’t get tar out of your lungs. You can’t bench press cancer away. Fast food may also be a carcinogen, so I might be a bit offbase bringing the C-word into it, but you get my point. A way to put it in perspective; given a choice, would you eat at Burger King three times a day (knowing that you can pick anything off the menu, or even if you could only eat burgers and fries) or smoke two packs a day. I believe that anybody not afflicted with an addiction to smoking would pick the former. I could be wrong about that though.

    People not eating the salads at McDonald’s cannot be an indictment on McDonald’s. It is not a lack of effort because the advertising showcasing healthy options now far outweigh the advertisements for Big Mac’s (very cheap value items still outnumber healthy commercials though). If I offered to give you a dollar or punch you in the face, how could you repeatedly asking to be punched be my fault? The punch is something I do because some people used to like (strange example but bear with me). And while yes the yogurt might have lots of sugar and the salads a tonne of dressing, but a baked potato is still a baked potato, an egg McMuffin (which I know is popular) is the same thing many healthy people would eat at home. You can disagree with them having a conscience, but the arguement could at least be made. I see why you thought I said that oil companies have a conscience but I did not mean that. They might, I do think they are trying to offer greener solutions, even if it is just a means of helping their bottom line. They might not though, I do not know for sure. I just meant that they are right now the most common solution for transportation, heat, and other needs.

    I can’t be considered an expert on smokeless tobacco but I do think that while obviously a lot better than smoking, it can’t be considered healthy in anyway. I know lots of people who use chewing tobacco, not many tout the health benefits. Lip cancer is a common occurrence among chewers I believe. I will not claim I am the one to draw any lines. That is up to individuals. I also would not invest in a smokeless tobacco company.

    I don’t think arguing that the government allows it is a good point. You think charging students exorbitant amounts of money to attend university is okay because the government does. A health topic requires health experts, doctors, to determine the right or wrong of it. Not many doctors will tell you to smoke just because it isn’t illegal. A lawyer would be able to tell you lots of immoral things that are legal for one reason or another.

    I do not think the right or wrong of smoking needs to be argued. The point I was trying to make was simply that tobacco is not as great of investment that everybody makes it out to me. There are lots of reasons that the tobacco industry is not sustainable. While the effects may never be seen by you or I, survival of the fittest would suggest that eventually because smokers are less likely to survive that eventually smoking will be phased out of society. Evolution takes a long time though. The bigger risks to the industry are people eventually being able to quit (more effective quitting aids invented, increased will power, etc), loyal users dying, increased laws preventing smoking, etc. The unsustainability would not necessarily prevent me from making the investment. The final decision comes down to me not feeling right about it.

    I always like dusting off my debating skills, and this is a topic which I will throw in my opinion.

    • Haha, I think you’re making the debate more complicated than it has to be. For me (and obviously a few others) it boils down to this:

      1) Tobacco companies produce products that are bad for you, other products are bad for you as well. To what degree they are bad for you is irrelevant to the moral decision of should you invest in products that hurt humans.

      2) By investing in tobacco companies no one is forcing anyone else to use their products. Just like no one forces anyone to eat fast food that causes early onset diabetes, or the alcohol that ruins multiple lives with addiction and drunk driving. People are still responsible for their choices and investors are not.

      3) What is worse, investing in Goldman Sachs which ruined thousands of lives through trading derivatives that they ultimately knew would fail (with nobody being the wiser) or making money off of conscious choice that people make after knowing all the relevant info (it’s printed right on the packs in Canada)?

      4) In terms of the economics of investing, you’re right, they don’t look good in North America; however, I think the growth potential in the rest of the world (billions of people) and smokeless tobacco.

      That’s a tough argument to counter by saying, “Cigarettes are worse by a fair margin than soda and fast food.”

      • I wasn’t trying to make it like this, I was very surprised how much I wrote both times. I wanted to offer a couple different points and a different view than the other commenters. I have no illusions of swaying opinions even though I would love to. I don’t think the difference in the products’ harm is irrelevant personally. It is in the eye of the beholder. But you can twist almost every companies’ business to make it look like it harms people.

        Yes by investing in tobacco I am not telling people to smoke, but smoking is now in my best interest. I would be happier if everybody quit smoking now, but if I had tobacco stocks then I would lose money. My wallet can’t play any part in my moral fibre.

        Eventually developing countries will become developed. At that point the tobacco industries there will be where they are here. It may be in 100 years or 200 years but it will happen.

        I was not trying to kick a hornets nest. Multiple opinions help foster educated opinions. While you have not and will not change my mind you have opened my eyes to some interesting things I wouldn’t have considered. I hope I did the same. After seeing how much I have wrote about this topic I could have made it a whole article.

        • Definitely Tyler, I really appreciate the input, and in fact, I was wondering when the other side of the argument was going to kick at first! Your definitely always welcome buddy! Thanks for being our collective conscience!

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